Keeping costs down is key

Fonterra Co-operative Council chair John Stevenson says farmers are feeling a real squeeze with increased input costs and decreased returns.

He points out that, at the current forecast milk price range, many stand to make losses in the current financial year.

"Farmers tell me that they are being ruthless as they look at what is essential expenditure within their own businesses, and what is not," Stevenson told Dairy News.

"They have sent a clear message to council, which has been passed on to the Fonterra board chair, that they expect similar discipline within their co-operative when it comes to managing costs."

With Fonterra slashing its forecast range midpoint by $1 to $7/kgMS, many farmers are bracing for a loss this season.

According to Stevenson, depending on debt levels and internal cost structures, $7/kgMS is widely accepted as being below the cost of production. He believes farmers will likely be working closely with their banks as they look to fund current cashflow requirements.

One silver lining will be the upcoming $800 million capital return to shareholders this month.

Fonterra has also signalled a strong dividend - a result of lower milk price lowering the cost of production for value added products.

Stevenson ays Fonterra shareholders will be looking forward to the upcoming capital return and the prospect of a strong dividend as they consider how their businesses are funded at the current mid-point of the forecast milk price range.